G-7: Nothing New

by: Michael Shedlock October 11, 2008    
Michael Shedlock

Michael Shedlock

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Bloomberg is reporting G-7 Commit to `All Necessary Steps' to Stem Crisis.

Group of Seven finance chiefs, meeting after global stocks plunged the most since 1970, pledged to prevent the failure of key banks while stopping short of fresh initiatives to thaw credit markets.

"The current situation calls for urgent and exceptional action," the finance ministers and central bankers said in a 266-word statement after talks in Washington. They committed to "take all necessary steps to unfreeze credit and money markets" without detailing how that would be accomplished.

My Comment: They have already taken urgent and exceptional action. Here is a partial list of exceptional actions.

In addition to those items, Germany, the UK, Canada, Iceland, and Russia have all taken exceptional actions.

With a global recession looming, the officials promised to ensure major banks have access to cash and are able to tap public funds for capital. By refraining from specific new measures such as embracing a U.K. plan to guarantee loans between banks, they run the risk of disappointing investors and exacerbating the turmoil.

"It sounds like jawboning," said Keith Hembre, chief economist at First America Funds in Minneapolis, which oversees about $100 billion in assets. "These are broad statements without any details."

My Comment: It sounds like jawboning because it is jawboning.

The vow to back "systematically important financial institutions" suggests authorities will not allow a repeat of last month's collapse of Lehman Brothers Holdings Inc., which precipitated the latest round of crisis. That may provide some relief for Morgan Stanley, whose stocks and bonds dropped for a fifth day on concern about the investment bank's health.

My Comment: How far does $350 billion go? That is all Paulson supposedly has access to, at least initially.

The G-7 nations were under pressure to roll out new policies and adopt a united front to quell the panic in markets after their previous steps failed to do so. Instead, they outlined principles for all nations to follow.

"We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth," officials said.

My Comment: I commit to praising motherhood, apple pie, and world peace.

Paulson said it would be "naive" to think that different nations in different circumstances could come up with the same policy paths.

My Comment: In other words, every country is going to "roll their own dice," which in fact they have already done.

"We have taken a lot of actions," European Central Bank President Jean-Claude Trichet said. "My experience of markets is that it always takes a little time to capture the elements," of the decisions taken, he said.

My Comment: Why bother with a conference now, if it takes time to see what's working? Besides, it sounds like you have already taken "all the necessary steps" if you can't agree to do anything else.

The G-7 officials shied away from endorsing a U.K. proposal to guarantee lending between banks either by turning central banks into clearing houses for the loans or having governments back them. They vowed to take steps that would give depositors confidence that their savings were safe and to restart secondary markets for mortgages and other securitized assets. The guidelines said any steps taken should protect taxpayers and avoid hurting other economies.

My Comment: There you have it, in plain English. They have agreed to do nothing other than create a list of guidelines. Those guidelines will be immediately set on fire as Paulson (and everyone else) does whatever the hell they want anyway.

While the joint statement made no mention of currencies, Trichet said the group viewed excess volatility in exchange rates as detrimental and urged China to allow faster gains in the yuan.

My Comment: If Trichet does not want volatility, then why is he asking China to allow faster gains in the yuan?

Bush said today that the U.S. "will continue to act to resolve this crisis and restore stability to our markets."

Hoover Moment

This is what I am wondering: Was Bush's statement today the equivalent of a "Hoover Moment"?

“The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.”  - Herbert Hoover, statement to the press, Oct. 25, 1929.

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This article has 17 comments:

  •  
    Oct 11 01:57 PM
    remember the movie The Road Warrior?:

    "Their leaders talked and talked and talked
    but nothing could stem the avalanche.
    Their world crumbled, the cities exploded.
    A whirlwind of looting, a firestorm of fear."

    nice last line, eh?
    Reply | Link to Comment
  •  
    Oct 11 02:32 PM
    This is very disappointing. I don't think it will get a good reaction next week.
    Reply | Link to Comment
  •  
    Oct 11 02:41 PM
    This is the best possible outcome from the summit. The best government action is always no action. Anything else they do will only further accelerate the destructive firestorm of hyperinflation.
    Reply | Link to Comment
  •  
    Oct 11 04:12 PM
    " I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson
    Reply | Link to Comment
  •  
    Oct 11 04:31 PM
    yeah, Thomas Jefferson! Boo, Alexander Hamilton!
    Reply | Link to Comment
  •  
    Oct 11 05:11 PM
    How far can 350 billion go? Well, the last stimulus check was 250 billion and it pumped up GDP for a quarter. That was a direct payment to individuals. This 350 billion is an equity investment in banks which can then turn around and lend it 8 times over, turning 350 billion into a trillion dollar stimulus check. What will that do for GDP?
    Reply | Link to Comment
  •  
    Oct 11 06:26 PM
    For those that want an education on ideas on how to solve the crisis in a more fitting and tested manner, we should all read "Fifty Billion Dollars" by Jesse H Jones, a book that is essentially an instruction manual for dealing with massive bank insolvency, which is the real issue at hand. Under the leadership of Jesse Jones, the RFC placed banks into three categories: A, B, and C. Category A banks were viable without assistance; B were recoverable; and C were the living dead. After the "bank holiday", only banks that were in sufficiently good health were permitted to re-open as private organizations. The category B banks were, over time, recapitalized using preferred shares. It was this use of preferred shares - i.e., recognizing that loans (a la the heretofore strategy for 2008) - that finally permitted the banking system to turn the corner. It is good that our leadership has finally recognized the need for this action. No amount of liquidity will cause counterparties to trust and lend when solvency is at stake. It should be noted, however, that no well publicized and understood process for identifying the "A-B-C" banks has been put into effect for this 2008 crisis. All national, state-member, state-non-member, S&Ls, and credit unions should be "tranched" into similar categories. In today's much more resilient system, the ability to identify these organizations should not take long at all, and a bank "holiday" would not be needed thanks to existing FDIC insurance and other "differences"... from the 1930's situation. Those banks that are "C" should be handed to FDIC as receiver and, as necessary, continue to run as "open banks" but under federal control until such time as assets and deposits can be transferred (like IndyMac). "B" banks should be recapitalized using preference shares. Repayment should be on favorable terms to the U.S. and all participants should have to stop current dividends. In some cases, certain percentages of current shareholders should be wiped out. U.S. will have controlling rights and be able, if necessary, to change management (something that wasn't often necessary in the 1930's).
    Reply | Link to Comment
  •  
    Oct 11 09:38 PM
    -->Getridofthemnow-

    Only problem is that the 1930's RFC $50B is a tad shy of its monetary equivalent today; Try $12 T which is a tad shy of Hanks $700 B

    www.rgemonitor.com/fin...
    Reply | Link to Comment
  •  
    Oct 11 09:51 PM
    vrspace, where are you getting your numbers? The dollar has lost nearly all its value, true, but $50b in the 1930s isn't $12T. Yet. Using the 1/20.67 oz pre-1933 price against 1/850 oz today, we find that $50b then would buy you about the same quantity of goods and services as about $2T would now.

    I doubt it will take us long to get there, though.
    Reply | Link to Comment
  •  
    Oct 11 09:52 PM
    Looking at the coming week consideration needs to be given not only to the G7 / IMF / G20 / Capital Injection and technical upsides but also to other issues weighing on the market such as: the far reaching imapct of CDS / Lehman auction fallout, margin calls, redemptions, hedge implosions, a devastated US consumer, currency upheaval, commodity collapse, US political future, changing political dynamic e.g. Moscow - Riyadh - Beijing - emerging markets instability etc... If only I could find my rose colored glasses and my long lost friend Pollyanna...

    Reply | Link to Comment
  •  
    Oct 11 09:55 PM
    I got the 12 T Number from the article referenced in my post here is the quote --

    "Created by the Hoover administration and expanded by the New Deal, the RFC's investments in American companies, mostly financial institutions, totaled $50 billion. Adjusted for the change in the Consumer Price Index since 1933, this is about $800 billion--but adjusted for the growth in nominal gross domestic product, it would be about $12 trillion.


    The most important element of RFC operations to address the nationwide financial collapse was its ability to invest in equity capital in the form of preferred stock, the same as the current British plan. More than 6,000 financial institutions, including many of the principal banks of the day, were the recipients of RFC investments."
    Reply | Link to Comment
  •  
    Oct 11 10:16 PM
    somebody has got to be making money out there...this is to good to be true
    Reply | Link to Comment
  •  
    Oct 11 10:39 PM
    I just watched the IMF press conference on Bloomberg. What a pathetic bunch... Jawboning... Perhaps BS by boneheads is more like it.

    Here's my economic equation:

    G-7 + G-20 + IMF = Global Destruction

    Where did they get these people? Wow! The London School of Economics must be taking (and graduating) anybody these days. Anyhow...

    Meanwhile... The American media is cranking it out... Trish Regan on CNBC and the Today Show... BUY! BUY! BUY! Pull out that credit card and BUY your brains out. After all Trish and Cramer need their jobs! New York Times... BUY! BUY! BUY! Those stocks! Gotta keep those advertising $$$ rolling in so GE will get a bump.

    After hearing from the IMF, the G-7 and G-20, seems like there is only one certainty about this global crisis is that the institutions who are supposed to save us are in a total state of denial. Then we have the American media every ready to sell us something... Iceberg, one degree off the bow, closing fast... World Leaders at the helm... Help us all...

    Can't wait to see the sea of red on the exchanges next week.
    Reply | Link to Comment
  •  
    Oct 12 12:05 AM
    vrspace - get an HP-12C and do your own calcs. Bearfund puts it in the right units - relative to gold. Placing in reference to GDP is silly. $12 Trillion...that's utter nonsense.
    Reply | Link to Comment
  •  
    Oct 12 07:45 AM
    Thanks for the education Getridofthem - GDP is indeed silly - much better to be a student of the Great Depression like uhh what his name Ben somthing... do you have plans for the bank holiday??
    Reply | Link to Comment
  •  
    Oct 13 12:56 AM
    Your welcome. I am always here to help the intellectually challenged. The losses we are dealing with in this situation is not = to the total mortgages outstanding in the U.S....your $12 trillion "fear mongering" number. The losses that exist on the balance sheets of today's banks is more in the range of $2 to $3 trillion. This is a huge number, and far exceeds the $700B TARP stack of "sugar". However, it does no one any good to spew silly numbers on what should be serious chat boards. SA expects better.

    Placing losses relative to GDP, especially nominal GDP, is crazy. Losses and nominal gross domestic product are two very separate things. The only thing in common is that they both represent big numbers, but placing two "big numbers" side by side is nothing more than, well, placing two big numbers side by side.

    What we should focus on is the amount of expected loss in the system. To do this, I urge you to stretch your mind on the simple calculation:

    * On average, banks have 35% of their assets in mortgage-related instruments
    * On average, there has been a 15% declined in home prices
    * On average banks have 10% capital to be considered "well capitalized" under PCA (do you know what PCA means?)
    * If we assume that bank mortgage assets are down 15%, this means a $5.25 loss in value
    * Thus, on average, most banks have seen their solvency hit by 50% remark
    * Thus, there are many wounded and many "dead" banks

    In order to save these wounded banks, we need to recapitalize them. How much will it cost? As a simple estimate, consider using the average decline in value (15%) against the volume of mortgages outstanding. This brings us to a $2 trillion bailout, approximately.

    Thus, if the point is to criticize the $700 billion as being insufficient....vrspac... couldn't agree more. It's at least 2.8x that amount that is needed.

    If, however, there is a suggestion that it's $12 trillion....well....th... bar the door. Dow will be 500 before we are done. That's an absurd number.

    Reply | Link to Comment
  •  
    Oct 13 08:11 AM
    Gitridofthemnow; Thanks for your simple and elagant explanation of why 700B is not enough to bail out the banks.

    The question I have now for you is this: Ben B. told congress that the banks can't be bailed out at fire sale prices, like Lehman's, for instance but thier OTC's should be somewhat (held near maturity) higher so that the American tax payer can make some money on this deal when a higher value is reached in the future. So, how much money do the banks really need to make this happen?

    And, let's say they get more, won't this cause the USD to lose value against all currencies. On the other hand, if this is indeed a world wide banking crisis, and there is no doubt that it is, then banks world wide, and not just the US will have to add liquidity so would'nt things just balance out?

    Thanks In Advance For Your Reply,

    Another intellectually challenged individuall.

    Bill W.
    Reply | Link to Comment
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